Shri Prabhulingeshwar Sugars & Chemicals Limited V. The Assistant Commissioner of Income-Tax, Central Circle-2, Sharadha Building, Saraf Colony, Khanapur Road, Tilakwadi, Belagavi-590 006 and The Commissioner of Income-Tax, Central Circle, C.R.Building, Queens Road, Bengaluru

ITA/100145/2015

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The case involves M/s Shri Prabhulingeshwar Sugars & Chemicals Limited, which appealed against the orders of the Income Tax Appellate Tribunal, Panaji, concerning the valuation of closing stock of molasses and bagasse, and the assessment of molasses yield for the assessment year 2010-2011. The Tribunal had reversed the findings of the Appellate Commissioner and confirmed the Assessing Officer's order, which the appellant contested. The High Court found that the Tribunal had not properly considered the evidence and legal standards applicable, leading to a decision to remand the case for re-evaluation.

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 799241 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 07-10-2015
• Assessment Year: misc
• Laws Referred To: Income Tax Act 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: Y V RAVIRAJ
• Assessee Lawyers: M V SHESHACHALA
• Keywords: Bagasse; Income tax appeal; Molasses; Valuation of closing stock; Net Realisable Value; Yield of Molasses
• Section: 260A; 40A(2)(b)

Judgement Text

": 1 : IN THE HIGH COURT OF KARNATAKA DHARWAD BENCH DATED THIS THE 7TH DAY OF OCTOBER, 2015 PRESENT THE HONOURABLE MR.JUSTICE ANAND BYRAREDDY AND THE HONOURABLE MRS.JUSTICE S.SUJATHA INCOME TAX APPEAL No.100145/2015 Between: M/s Shri Prabhulingeshwar Sugars & Chemicals Limited, Registered Office: 1st Floor, Sukrut Building, Opposite to K.C. Park Main Gate, Dharwad, Represented by its Executive Vice President, Sri V.Subburathinam, PAN:AACCS7864B. … Appellant (By Shri.M.V.Sheshachala, Senior Advocate for Shri J.M.Gangadhar, Advocate) And: 1. The Assistant Commissioner of Income-Tax, Central Circle-2, Sharadha Building, Saraf Colony, Khanapur Road, Tilakwadi,Belagavi-590 006. : 2 : 2. The Commissioner of Income-Tax, Central Circle, C.R.Building, Queens Road, Bengaluru. … Respondents (By Shri.Y.V.Raviraj, Advocate) This appeal is filed under Section 260A of the Income Tax Act 1961, praying to allow the appeal and set aside the orders passed by the Income Tax Appellate Tribunal, Panaji Bench, Panaji, in ITA No.182/PNJ/2014, dated 07.07.2015 produced as Annexure-A, order of the Appellate Commissioner of Income Tax, Central Circle-2, Belagavi, dated 24.12.2012 produced as Annexure-C and confirmed the order passed by the Commissioner of Income Tax, (Appeals) No. ITA No.32/ACIT, CC-2, Belgaum/CIT(A)VI/B’lore/2012-13 dated 28.02.2014 produced as Annexure-B and etc., This appeal coming on for admission, this day, Anand Byrareddy J., delivered the following: JUDGMENT Heard the learned Senior Advocate Shri M.V.Sheshachala, appearing for the learned counsel for the appellant and Shri Y.V.Raviraj, appearing for the Revenue. 2. The present appeal is filed under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’ for brevity), being aggrieved by the order of the Income Tax Appellate Tribunal, Panaji Bench, Panaji, in ITA No.182/PNJ/2014 dated 07.07.2015 whereby the order passed by : 3 : the Commissioner of Income Tax (Appeals)-VI, Bengaluru, dated 28.02.2014 was set aside and the order passed by the Assistant Commissioner of Income Tax Central Circle-2, dated 24.12.2012 was confirmed. 3. The matter pertains to the assessment year 2010-2011. The facts of the case are the assessee is said to be carrying on business in the manufacture of sugar and co-generation of electricity. The assessee has filed returns of income tax on 27.09.2010. The controversy relates to the following: a) Valuation of closing stock of molasses, b) Valuation of closing stock of bagasse, c) Fall in the yield of molasses production during the year. 4. The assessee in the course of manufacture of sugar extracts sugar from crushing sugar cane and the by-produces are molasses and bagasse. The assessee had declared 12119.550 metric tonnes of molasses valued at Rs.4,01,78,529/- as the closing stock, whereas, the closing stock of bagasse was declared as 19065.426 metric tonnes valued at Rs.3,05,04,682/-. It was the contention of : 4 : the assessee that the legal position regarding valuation of closing stock was that same can be valued at the cost price or at the market price, whichever is lower. In view of the fact that bagasse and molasses are by-products of sugar extracted from sugar cane, the cost price of these two products can be ascertained only through the net realisable value. Hence, the cost price was ascertained by adopting the net realisable value and the same was worked out for the purpose of computation of closing stock. 5. The Assessing Officer, however, held that the assessee had sold bagasse and molasses during the current assessment year at a higher rate than that declared in the closing stock. It is contended that the Assessing Officer had failed to notice that the legal position is that the option of the assessee to declare the closing stock at either the ‘cost value’ which is in the case of the assessee ‘net realisable value’ or ‘market value’,whichever is less. As the assessee had adopted the cost value, that is, the net realisable value, the same cannot be questioned by the Assessing Officer, as it is in consonance with the law. However, the Assessing officer having held that the assessee should have adopted the market : 5 : value for the purpose of computation of closing stock of both molasses and bagasse, the order has resulted in being prejudicial to the appellant. 6. The Assessing Officer had further held that the yield of molasses during the current assessment year should be 0.19% higher than that declared by the assessee. This would have amounted to 930306.629 metric tonnes at the rate of Rs.5,121/- per metric ton. The Assessing Officer proceeded to adopt the production of molasses, immediately, during the preceding year and arrived at the said figure. Though, the assessee attempted to highlight that at least, the previous 10 years’ yield should be taken into account, it was ignored. 7. It is contended that the Assessing Officer had failed to consider several circumstances, namely, the irrigation that the sugar cane crop would have received, the time of crushing of the sugar cane and weather conditions and several other factors, which are, such as the demand for the product and the rate at which the products could be sold. However, the Assessing Officer : 6 : had not taken this into consideration and estimated a higher production of molasses. 8. Therefore, the assessment order was challenged by way of appeal before the Appellate Commissioner, who took a view that the findings recorded by the Assessing Officer regarding computation of closing stock was contrary to law and in the facts of the case and further, it was held that the valuation regarding production of molasses, was also not in consonance with the law and the findings of the Assessing Officer were set aside. 9. The Revenue, being aggrieved, had preferred an appeal before the Income tax Appellate Tribunal and the Tribunal having reversed the finding of the Appellate Commissioner, having confirmed the order of the Assessing Officer, the present appeal is filed. 10. One other issue is regarding the sale of molasses to a sister concern of the appellant. It was the case of the Assessing Officer that a uniform sale price was not adopted. The sale price varied between Rs.6,000/- and Rs.3,500/-. The Assessing Officer : 7 : invoked Section 40A(2))b) of the Act, to hold that the sale price should be uniform and adopted Rs.6,000/- as being the uniform price throughout the year. It was the contention of the assessee to the effect that the price of molasses varied throughout the year and the market value was fixed, based on the actual rate prevailing in the market, that is, the sale price during the season. The Assessing Officer had negated the same and proceeded to make an addition of Rs.4,92,00,000/-. 11. The assessee, being aggrieved, had preferred an appeal before the Appellate Commissioner who had reversed the finding of the Assessing Officer and who accepted that the corresponding rate adopted by the assessee as being commensurate with the prevailing market rate, during the season of the year and the year of sale. The order of the Assessing Authority was set aside. However, the Income Tax Appellate Tribunal, had reversed that finding. It is these findings, which are under challenge in the present appeal. : 8 : 12. The learned Senior Advocate Shri Sheshachala, would point out that the Tribunal has proceeded on certain factual errors, insofar as, the closing stock of bagasse taken at Rs.1600 per metric ton considering the market value prevailing at the year end was concerned and also having due regard to the quality of the bagasse, the Tribunal has proceeded to hold that there was no documentary evidence to show that the net realisable value of bagasse as at the year end was Rs.1,600/- per metric ton and because the assessee has failed to prove the method of valuation under the net realisable method nor had produced any bills for comparison to show the valuation of bagasse, had reversed the finding of the Commissioner of Income Tax Appeals. 13. In this regard he would draw the attention of the Court to the order of the Commissioner of Income Tax Appeals where he has specifically referred to the material produced, insofar as, the valuation of the closing stock of the bagasse is concerned. The Commissioner, in his order at paragraph 7, has specifically dealt with the valuation of closing stock of bagasse and has referred to the evidence produced by the appellant and the explanation : 9 : offered that the closing stock of bagasse as on 31.03.2010 was at Rs.1600 per metric ton, considering the prevailing market value at the year end which is the practice followed by all sugar factories. The quality of bagasse also determines the rate and in loose form, long staple form, wet form and also bagasse containing more foreign material etc., the value could not be taken at Rs.2,821/- as was done by the Assessing Officer. The value would include the cost of transportation of bagasse, as well. The net realisable value of Rs.1600 per metric tone was therefore reasonable and the Commissioner of Income Tax (Appeals) has referred to Annexure-6 and Annexure-7, produced along with the appeal memo before him, to indicate that the company had sold bagasse at a particular rate during the financial year 2008-2009 and the sale details along with the quantity and rate as at Annexure-6 and the average selling price was Rs.900/- during the year 2009-2010 and in this regard, sale invoices were produced by the appellant’s factory at Annexure-7 and further the closing stock having been sold at Rs.1600 per metric ton, the Commissioner has accepted the material produced to adopt Rs.1600 per metric ton, as the value of : 10 : the closing stock of bagasse. This, the Tribunal having over looked and ignored, the learned Senior Advocate would submit that there is a miscarriage of justice and the material on record has been over looked by the Tribunal, which would warrant the matter being remanded for a fresh consideration by the Tribunal. 14. Insofar as the valuation of the molasses is concerned, again the Tribunal has appreciated the method adopted by the Assessing Officer in having proceeded on the basis of comparison of the molasses valued by a similarly placed company as the appellant and that the assessee had failed to dislodge the comparison made. This, the leaned Senior Advocate would point out is wholly inconsistent and not in consonance with the law and would draw attention to the reason adopted by the Commissioner of Income Tax Appeals, which is appropriate and a correct view of the valuation of closing stock of molasses, at paragraph 6 of the order of the Commissioner of Income Tax (Appeals). 15. The explanation offered by the assessee was that the selling rate of by-products such as press mud, molasses and steam is : 11 : determined at a meeting called a Special Committee meeting, consisting of independent Directors. At the said meeting, the sale price of by-products was fixed after giving due consideration to the fair market price of by-products. The Minutes of the said meeting was produced as Annexure-5 to the appeal memo, to establish that Section 40A(2)(b) of the Act, has not been violated and that the price of the molasses varies with respect to quality, demand and supply condition, prevailing in the market and the molasses is limited, when compared to molasses price during the seasonal period, as there is a glut in the market. The closing stock has been valued at the net realisable value prevailing as on 31.03.2010 based on the quality of molasses and the market rate for the same. There has been a fair valuation of molasses of all grades at Rs.3,315/- per metric ton and that the assessee has not adopted the average realisation rate for valuation of molasses and there was no attempt to conceal the value of the closing stock of molasses. 16. The Assessing Officer, however, having proceeded on a comparative method of valuation, was therefore not appropriate : 12 : and the Commissioner of Income Tax (Appeals) has accordingly accepted the explanation offered by the assessee. The Tribunal, however, has noticed that the prevailing price of molasses has been shown in respect of three different sugar factories ranging from Rs.6,000/- to Rs.5,600/- and therefore, has held that when Rs.6,000/- was the prevailing market rate, the assessee must have sold the molasses at Rs.6,000 per metric ton and that there was no reason why the said rate should not be applied. 17. The learned Senior Advocate would point out that the rates mentioned are rates that were prevailing at various times of the entire year and not at the end of the season. The relevant value of the closing stock of molasses, was as on 31.03.2010 and not the rate, which it may have touched during the rest of the year and this error committed by the Tribunal, has resulted in the confirmation of the assessment order. The Tribunal has taken exception to certain documents being produced which indicated misleading dates as noted at paragraph 36 of its judgment. However, the adoption of the higher price during the year would not be relevant, insofar as, arriving at the valuation of the closing stock to : 13 : molasses. Therefore, the Tribunal would have to take a re-look at its assessment of the same, in confirming the order of the Assessing Officer. Insofar as, the misleading documents that were produced by the appellant, it would be for the appellant to offer a proper explanation as to any inadvertent mistake in producing such documents, which could be done on a remand of this matter for re-consideration of the above issue. 18. The other issue pertaining to the sale of molasses to its sister concern is concerned, the rates had varied between Rs.6,000/- to Rs.3,500/-. This was in consonance with the actual fluctuation of the rates over time. In that, when there is a glut in the market, the prices go down and when there is no such supply, the price goes up and it is for this reason, that the assessee had claimed the sale of molasses at rates varying between Rs.6,000/- to Rs.3,500/- per metric ton, insofar as, the sales made to its sister concern by the appellant. The Assessing Officer having adopted a uniform market rate for the sale of molasses, has been confirmed by the Tribunal. This is apparently erroneous, as it is a matter of fact, that the price of molasses would certainly vary during the : 14 : year and this is a patent error committed by the Tribunal in arriving at such a finding. The Tribunal having taken exception to sales having been effected earlier and rates having been indicated later, is explained by the learned Senior Advocate by referring to the approval that was essential to be obtained in respect of such sales from the Sales Committee that is formed to fix the rate and it is only upon the rate being fixed by the Committee, it could be indicated. This would not give rise to any presumption that there has been a fudging of accounts or an attempt to conceal the actual rate of the molasses that was sold. The Tribunal has committed a serious error which requires to be set aside. 19. Insofar as the valuation of the prevailing stock of molasses and the prevailing stock of bagasse is concerned, in our opinion, the Tribunal has overlooked the material which was available before it and the explanation offered by the appellant, which would require the Tribunal to reconsider the matter afresh. 20. Yet another issue pertains to the deletion of the addition on account of the fall in yield of molasses. It was the assessee’s : 15 : contention that there was a drop in the yield of molasses by 0.42% and that during the relevant assessment year, the yield of molasses was at 3.87%, whereas, for the immediately preceding year namely the assessment year 2009-2010, the yield was at 4.29%. The Assessing Officer had made an addition representing a shortfall in the yield of molasses and the Commissioner of Income Tax (Appeals) had deleted the addition as there was no specific evidence of any discrepancy in production. The Tribunal has held that with the drop in yield of molasses, there must be a substantial increase in the yield of sugar and vice versa, but, the Tribunal has noticed that the consumption of the sugar cane had increased substantially more than the preceding assessment year. However, the yield of sugar has increased marginally, but, the yield of molasses has dropped by nearly 10% compared to the immediately preceding year and admittedly, the Tribunal has held, that the assessee was unable to justify that the shortfall of the percentage of yield of molasses as compared to the immediately preceding assessment year and that the assessee had not produced any details to substantiate its claim that the average yield of molasses during : 16 : the last 10 years was only in the range of 3.6%. However, this finding of the Tribunal to the effect that the assessee had not produced any material to substantiate its claim that the average yield of molasses during the last 10 years was only in the range of 3.6%, is erroneous and contrary to the material on record. The appellant had indeed produced the figures relevant to the previous 10 years, which would have substantiated their case. The Tribunal has therefore committed a palpable error in overlooking the material available on record. Hence, on these above grounds, the appeal is allowed and the matter is remanded. The judgment of the Tribunal is set aside and the matter is remanded for a fresh consideration on the above issues. Sd/- JUDGE Sd/- JUDGE Jm/- "